The 2021 Federal Budget is largely unsurprising, yet is still one of the strangest we have seen. Paradoxically (and appropriately) the announced measures are highly stimulatory, despite evidence suggesting Australia is roaring into a post-COVID recovery period.
The Treasurer has received unexpectedly good news, with exports - particularly of iron ore - cutting into the deficit created by COVID rescue measures. Rather than banking the additional revenue, the Treasurer opted to redistribute funds in a manner that looks suspiciously similar to that of an election year.
We will leave it to the economists to debate the effect of these measures on the overall economy.
The McCullough Robertson Tax Team have identified a number of specific tax related measures which may not attract headlines, but are likely to have a significant impact on our clients. We will provide more information on these measures in later updates, but for now, here are our first impressions of some of the more surprising tax-related measures.
Tax residence of individuals
Simpler? That remains to be seen
Seven months after announcing corporate tax residence would be modernised (details pending), the Treasurer announced individual tax residence will now also be modernised and simplified with new rules touted as providing a bright line test for residence.
Drawing on the 2019 recommendations from the Board of Taxation, any individual that is in Australia for more than 183 days in a financial year will be an Australian tax resident: the so-called bright line. If the Board of Taxation recommendations are followed to the letter however, for those that are not in Australia for 183 days, or are arriving/departing Australia the line is not as bright. In short, an individual need only be in Australia for 45 days to be determined a resident, however they must also establish a requisite number of objective factors.
What this means
In practice, the 183 bright line test operates only to bring people within the Australian tax residency net. It provides no certainty with respect to Australian residents departing Australia.
The test appears to simply remove recognition that an individual will not be a resident if they have a usual place of abode outside of Australia, which was given a 'taxpayer friendly' interpretation in the decision of Harding before the Full Court of the Federal Court of Australia. In addition, the objective factors appear reminiscent of the current elements to determine ordinary residence (Cf. TR 98/17) - particularly following the decision in Harding at first instance, when Justice Derrington confirmed that objective factors should evidence the intention of an individual (under the current ordinary residence test) and therefore residence.
The Board of Taxation recommendations suggest that the Commissioner will have a discretion to confirm an individual is not resident if caught in Australia for more than 183 days, making even that aspect of the test uncertain. We look forward to viewing the proposed legislation and how it might tackle the impact of a global pandemic.
In our view, there is still some way to go before the issue of individual residence is settled (or a 'simple' question of fact).
Small businesses need no longer fear the debt collectors' knock...
...subject to persuading the Administrative Appeals Tribunal
As any individual or business in dispute with the ATO has experienced, it is often extremely difficult to balance the capacity to appeal a decision while simultaneously fighting ATO debt recovery action. Although the Commissioner of Taxation has stated publicly that the ATO should not seek to recover disputed debts, we are very aware from recent experience that this does happen.
The proposed Budget measures will allow small business entities (i.e. businesses with an aggregated turnover of less than $10 million) to apply to the Administrative Appeals Tribunal to pause or modify ATO Debt recovery action.
What this means
This is a fantastic option for small businesses and should, in theory, significantly simplify the process of pausing ATO debt recovery proceedings, which until now required the taxpayer to go through the onerous, expensive (and often futile) task of obtaining a 'stay' of the proceedings in the State Supreme Courts or Federal Court.
Critically, however, this proposal appears limited to small business entities which, at least on the face of the announcement, would exclude individuals or entities which do not actively conduct a small business. There is no logical reason why an individual employee, principal or family member of a small business operator should not be able to access these measures and it is hoped that this obvious oversight will be corrected.
There is also an ominous phrase in the Budget fact sheet that the AAT will be need to have regard to the integrity of the tax system in deciding whether to pause recovery action. We anticipate that there will be a great deal of virtual ink spilt arguing over the meaning of this caveat. We look forward to seeing the draft Bill proposed swiftly and enacted, with gaps appropriately plugged.
Employee Share Schemes
Assisting Australian employers to attract and retain staff
In an effort to help Australian employers attract and retain employees in an increasingly competitive job market, a number of amendments to the employee share scheme (ESS) provisions have been announced.
Currently, the deferred taxing point for employees for interests subject to deferred taxation under Division 83A of the Income Tax Assessment Act 1997 (Cth) (ESS Rules) provided that the deferred taxing point will arise upon the earliest of the following events:
- The employee ceasing employment (in circumstances where they are otherwise permitted to retain their interests);
- when there is no risk of forfeiture and no restriction of disposal of shares acquired under an ESS;
- (for options) when the employee exercises the option and there is no risk of forfeiting the shares acquired and no restrictions on disposal; and
- 15 years from the date the ESS interest was acquired.
What this means
Whilst any simplification of the ESS Rules is welcome and the above announcement certainly brings Australia into line with a number of other jurisdictions around the world, in our view this change is likely to have limited practical impact. In many cases, it would be usual for ESS interests to terminate upon an employee ceasing employment, rather than those interests remaining on foot after they have left.
This change will apply to ESS interests issued from 1 July in the income year after the date of the Royal Assent of the enabling legislation.
The Federal Government has also announced that it will reduce 'red tape' for ESS by creating a dedicated conditional exemption for the disclosure, licensing, advertising, hawking and sale obligations imposed under the Corporations Act for such arrangements which extends the nature of the current provisions.
Extension of COVID Measures assisting businesses with cashflow
The Budget also announced the extension of a number of measures introduced in response to COVID, including:
- extension of the temporary full expensing measures to June 2023. The measures allow eligible businesses with an aggregated income of less than $5 billion to deduct in full the cost of eligible depreciable assets; and
- the temporary loss carry back measures have been extended by an additional year to allow eligible companies to carry back losses from the 2022-23 financial year to offset previously taxed profits from the 2018-19 financial year onwards.
A 17% corporate tax rate for income from Australian medical and biotech patents
Could Australia become a hub for medical research?
Australia has a proud history of innovation, developing game changers such as the cochlear implant, HPV vaccine and technology which led to the pacemaker.
Finally, the Australian government has recognised the importance of keeping the benefit of these innovations onshore, joining a number of EU countries and the UK in granting heavily incentivised tax rates (17%) to income derived from such patents through a newly announced patent box.
What this means
This measure is yet to be legislated and details will be critical. Our life sciences team has experience in EU countries, including Ireland, in the development and implementation of patent box taxation.
This is an extremely welcome development and promises to place Australia at the forefront of medical and biotech research well into the future.
Scrapping the $450 income threshold
The Government proposes to remove the current $450 per month minimum income threshold under which employers do not have to pay the superannuation guarantee to their employees.
What this means
The removal of this requirement is expected to boost the retirement income of individuals in the lower income brackets each month, including part-time workers and working parents.
From a business perspective, employers will need to ensure that they commence superannuation guarantee payments for all employees.
This measure is expected to take effect from 1 July 2022.
Increasing choices and cutting the red tape
The Government will reduce the eligibility age to make 'downsizer' contributions into superannuation from 65 to 60 years of age and will repeal the work test for non-concessional and salary sacrificed contributions to superannuation.
The downsizer contribution allows people to make a one-off, post-tax contribution to their superannuation of up to $300,000 per person from the proceeds of selling their home. Under this measure, a couple can contribute in respect of the same home without affecting their non-concessional contribution caps. The Government will also allow individuals aged 67 to 74 years (inclusive) to make or receive non-concessional (including under the bring-forward rule) or salary sacrifice superannuation contributions without meeting the work test, subject to existing contribution caps. Under this measure, individuals aged 67 to 74 years will still have to meet the work test to make personal deductible contributions.
What this means
This measure cuts the red tape and provides older Australians with more choices to contribute to their retirement savings. Both measures are expected to take effect from 1 July 2022.
Extending tax relief by expansion of the LMITO
The low and middle income tax offset (LMITO) will also be extended for the 2021-22 income year. The LMITO provides a reduction in tax of up to $1,080 for individuals or $2,160 for dual income couples, with the maximum benefit going to individuals with taxable incomes between $48,000 and $90,000.
The offset will be received on assessment after individuals lodge their tax returns for the 2021-22 income year.
Investment into infrastructure and transport
Roadtrip to recovery
A headline of the Budget is around $10 billion in newly announced spending towards infrastructure projects across the nation, with a specific focus on transport.
In Queensland, $1.6 billion will be allocated to the State's regional and urban road and rail infrastructure with:
- $400 million towards the potential makeover of the iconic Bruce Highway;
- $400 million towards upgrading the Inland Freight Route from Mungindi to Charters Towers; and
- $240 million towards the Cairns Western Arterial Road Duplication.
In New South Wales, $3.3 billion will be directed to bolstering road projects, with:
- $2.0 billion towards the Great Western Highway Upgrade between Katoomba to Lithgow;
- $500 million for the Princes Highway Corridor, including the Jervis Bay Road Intersection and Jervis Bay to Sussex; and
- $240 million for the Mount Ousley Interchange.
What this means
The Government has placed a keen focus on improving road infrastructure, which will not only address safety concerns in a number of places, but may both bolster job growth and facilitate a quick roadtrip to the delight of the tourism industry. There is no doubt that many will be interested in how these allocations play out in practice.
Light the way to recovery
The Budget builds on last year's measures for Australia's gas-fired recovery. Specifically, the Government will provide $58.6 million over four years to support a number of key gas infrastructure projects.
In addition, on the East Coast, $38.7 million is aimed at supporting gas infrastructure projects, and further funding will drive the development of the Wallumbilla Gas Hub and the 2022 National Gas Infrastructure Plan.
What this means
Collectively, these measures reflect that the Government is placing a focus on unlocking the nation's access to gas supply, alleviating potential gas shortfalls, and forecasting and identifying future gas market requirements and strategic infrastructure investment priorities.
Small mining companies will also benefit from an extension of the Junior Minerals Exploration Incentive. The budget will set aside a further $38.8 million over two years from 2023-24 (and a further $38.8 million over two years from 2025-26) to extend the program for four years from 1 July 2021 to 30 June 2025, to bring this measure to a total cost of $100 million.
What this means
The availability of the tax incentive for investors in junior minerals exploration companies that raise capital to fund green-fields exploration activity will be extended.
Ag is big business
Supporting our farmers
It was a big Budget for the agricultural sector, with more than $850 million to be provided over the next five years to help the farming sector become a $100 billion industry by 2030.
This includes funding for a number of measures to ensure that Australia's agricultural industry can survive the myriad of biosecurity threats it constantly battles with, such as:
- $25.5 million over four years from 2021-22 for modern technologies and diagnostic tools to improve the speed and accuracy of pest and disease identification in crops;
- $29.1 million over four years from 2021-22 for reduction and prevention activities to reduce the economic and environmental burden of established feral animals, pests and weeds; and
- $102 million over two years from 2021-22 to incentivise farmers to increase soil testing, and enhance the National Soil Resources Information System by feeding in new and existing data.
Additionally, and in keeping with the general theme of getting people, and keeping people, back in the workforce:
- $10.1 million will be spent on a pilot AgUP program to co-fund industry initiatives that build skills and enhance career progression pathways in the agricultural industry;
- $5.3 million will be spent on a pilot AgCAREERSTART program for school leavers to undertake farm placements; and
- $1.3 million for a research and development corporation to undertake research on community perceptions of agricultural work and the attraction and retention of agriculture sector workers.
What this means
These measures should provide a significant boost to the security, viability and development of the agriculture sector. In the wake of Beef 2021, it is fantastic to see the Australian government extend its support for the agriculture industry.
One for the women
It has been well publicised that the 2021 Budget is 'one for women', with a number of measures announced in highly topical and long awaited areas - all in line with the Budget's general theme of getting Australians back into the workforce and, in time, prepared for retirement without strain on the Australian economy.
The announcements appear to acknowledge that on the whole, women's employment and financial security suffered more than men's during the COVID pandemic. Studies have shown that on average, women's employment decreased up to 25% more than men's employment, partly due to roles which are traditionally women-centric being unable to continue to operate during pandemic type conditions.
What this means
As a result, the Budget has provided significant further measures to encourage women in the workforce including $42.4 million to establish the Boosting the Next Generation of Women in Science, Technology, Engineering and Mathematics (STEM) Program and additional funding to encourage women workers to enter workforces that have historically been male dominated.
The Budget has announced an additional $1.1 billion towards women's safety measures which includes delivering more emergency accommodation, legal assistance, readily available counselling, financial support, and targeted services for First Nations People and migrant refugee women who have statistically been found to be greater at risk of suffering at the hands of abusive partners.
However, regrettably, these measures are offset by the Government's decision to not proceed with a previously announced consideration of allowing domestic and family violence victims early access to their superannuation.
Increase to Child Care Subsidy
One of the measures expected to have the most impact is the announcement of $1.7 billion in funding to improve affordability of childcare for Australian families. This includes an increase to the Child Care Subsidy for second and subsequent children aged five and under. In addition, the annual cap on child care subsidy payments will be removed for all families.
What this means
On a practical level, this funding is expected to allow an addition 40,000 individuals to work one extra day per week while maintaining affordability of access to childcare. The Treasurer announced during his Budget speech that this measure will leave up to 250,000 families with children in childcare better off by $2,200 annually.
Schemes for alcohol manufacturers
Treasurer Frydenberg joins Dan Andrews in encouraging people to get on the beers
Treasurer Frydenberg appeared to gleefully announce that the Government is increasing the excise refund cap for distillers and brewers to support jobs and further grow Australia's alcohol manufacturing sector which will benefit around 600 brewers and 400 distillers.
From 1 July 2021, all eligible brewers and distillers will receive full remission (up from 60 per cent) of any excise they pay on the alcohol they produce up to a cap of $350,000 each financial year (a massive increase from the previous cap of $100,000).
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